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Building a strong board

Building a strong board

This blog post is based on KPMG Family Business and WomenCorporateDirectors (WCD) research and interviews as contained in the joint report “Enduring Across Generations: How Boards Drive Value in Family-Owned Businesses”.

Highlights

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Board seats are expensive real estate. Care should be taken to ensure that each and every one of those seats is occupied by someone who has the right skills and is willing and able to devote the timeto help management and the owners advance the company’s needs and prepare to address its challenges.

Building a strong, value-adding board requires attention not only to the skillsets of the individual directors, but also to the overall mix; a strong board works together in a way that enables the group as a whole to add value well beyond the sum of its parts.

Experience and Attributes

The focus on board composition has advanced significantly over the years for both public and private companies. While in the past boards often consisted of the founder’s friends and colleagues, now, increasingly, as a matter of good governance and best practice, directors are selected for the strategic value they can add.

There is no such thing as an ‘ideal’ composition that will work for every board; the right compositionwill vary tremendously from company to company, and the ideal composition for any individual company will likely change over time as its strategy and business environment evolve.

To help build the ‘right’ board, and keep it refreshed and aligned with the evolving needs of the business, companies have found it helpful to develop a skills matrix. In other words, they determine the attributes that are most needed to help the company achieve its goals over the next five to ten years and mark the attributes of existing directors against this list. This matrix can help identify gaps and serve as the basis for a focused search, both for building a new board and fine-tuning an existing one.

Family businesses may have gaps in skills or knowledge, and a director who has experience in the missing area as well as the ability to provide overall input on strategy can be beneficial.

For example, expertise in doing business outside the company’s home country may add a valuable perspective that the company would not otherwise have; a director who is knowledgeable about technology, or marketing, or talent development and succession may add value in helping the company address challenges going forward in these areas; a director who has experience with enterprise risk management (ERM) may provide valuable perspective to aid the board in its oversight of risk. Particularly if the company is looking toward outside financing in the future, either throughdebt or equity, strong independent financial oversight at the board level will also be essential.

Developing a Skills Matrix

“While we originally developed our skills matrix for director recruitment, we now use it more as a governance tool and map for succession planning,” said one of the report’s Commissioner. In this instance, ownership of the matrix rests with the directors themselves and is reviewed by the governance committee. In addition to areas of expertise, boards benefit from directors who have backgrounds or attributes that enable them to share perspectives that are different than the perspectives of those immersed in the business.

For example, one Commissioner identified the value that was added to the board by the perspective of a business owner of a non-competitive company that was about five years ahead in its life cycle; the wisdom imparted in terms of learnings, cautions, and suggestions was immeasurable.

And, like any board, public or private, diversity is a critical consideration to ensure robust discussion by a well-rounded group that brings different perspectives to the table.

The Importance of “Fit”

The right skillsets and experiences are no guarantee that a director will be successful in his or her role on the board.

Demeanour and personality; chemistry with other board members, management, and the family; emotional quotient (EQ) and other “soft” factors, will also determine whether a director is a good fit for the board. And while the contributing factors may be “soft,” the impact can be significant. Simply put, the rightfit can make or break a board. Fit is important in the boardroom of any type of company, but the extra layer of the family dynamics adds another dimension to family businesses. As Paula Marshall puts it, “You come in at the purview of the one running the company, and you’re going to be dealing with those other 14 or 15 family members.”

As important as fit is, it is equally important to understand what it is not. This is not about finding board members who simply “fit in” and fall into the trap of groupthink.

To ensure the right fit, candidates for board membership often meet with every member of the board as well as key family members before they are elected. And fit should be revisited over time as the dynamics may change. “Always be independent. Evaluate your contribution after every board meeting. If you are not adding value, it is no longer a good fit and it’s probably time to leave,” suggests Richard Doern of KPMG in Brazil.

Outsiders as Board Members

Many of the Commissioners suggested that owners of other family businesses can make valuable members of the board of a family business due to their understanding of the unique challenges. “People who have been there, felt it from their gut, can better empathize with and understand” what the owners are going through and are a tremendous asset on other family business boards, observes Liora Katzenstein of KPMG in Israel.

Family Members on the Board

While having family members serve on the board can provide real value, care should be taken to ensure that the family member is on the board for the right reason, and that his or her role is clearly understood.

Like any board member, family members on the board should have experience that is of value to the company and fills a gap on the board’s skills matrix, as well as personal characteristics that will enable them to operate successfully in the boardroom. A number of Commissioners say that family members who have experience with other companies in addition to the family business make particularly good board members due to the breadth of their perspective.

A board that consists of a majority of nonfamily members may be best positioned to gain the benefit of independent thinking. In some companies, the majority of the board members are independent directors. For other companies, the nonfamily directors may include members of management and/or individuals who have ties to the family such as advisors or lawyers, as well as independent directors. Regulations and best practices may vary from country to country; the key is to ensure that whatever the mix, the board includes independent thinkers and diversity of thought.

Every board member is obligated to act in the interests of the business and the owners as a whole, regardless of how they came to join the board. Particularly in family businesses that allocate board seats to different branches of a family, there can be misunderstandings regarding this obligation. Training can help.

Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.